the Financial Services Authority has told the Yorkshire Post that its crackdown on banks’ real estate risk models was nothing more than a “sensible process” amid criticisms that the tightening oversight would prevent commercial property lending.
The move by the FSA means that lenders will be required to attach greater risk to property loans, increasing the capital banks will need to hold.
But as banks measure their performance by return on capital, an increase could depress their performance.
A potential move from current models used to calculate capital on loans to a new standardised system may have implications for the real estate industry.
Simon Lister, investment director at Savills in Leeds, said that banks are taking a more robust approach to lending and property risk, tightening their risk models.
He told the Yorkshire Post: “As a result the availability of debt is scarce.
“While I believe a longer term more robust risk model is healthy, immediate heavy regulation could hinder market recovery in the future.”
In the short term, banks are having to raise capital by increasing new equity or profits – or both.
But if they can’t raise capital they can sell off loans and cut back on new lending.
It is feared that this will depress the commercial lending market – a market already deprived of financing.
Alistair Russell, head of agency at Dunlop Heywood, a professional property services firm in Leeds, said: “The markets outside London are very uncertain. If I were to look, I would struggle to find money for commercial property today.”
Liz Peace, chief executive of British Property Lending Federation, said increasing the weighting of property could “put the brakes on deal making in the sector and slow down the deleveraging process”.
The FSA said the tightening of its oversight of commercial property lending is “purely to reflect accurately on capital held alongside assets”.
The Financial Policy Committee has advised the FSA to encourage banks, managing their balance sheets in such a way that would not provoke market or economic fragility.
Retrenchment of British banks is creating opportunities for overseas investors. A number of foreign banks are now entering the UK commercial property market hoping to pick up good deals from banks trying to deleverage their bank sheets.
“We have been advising high profile and cash rich US investors who are active in the region which includes both US Banks and US backed opportunity funds,” said Mr Lister of Savills. He added: “We are aware of Chinese investors nationally – there seems little activity in the region at present but we anticipate this will change.”